Financing Your Fleet

Amanda Lundmarkassistant vice president of sales
– 1st Source Bank Bus Division

Matt Hotchkisssenior vice president, bus division sales manager
– Wells Fargo Equipment Finance

Gregg Goeddevice president– ABC Bus Leasing, Inc.

Greg Bergdirector of commercial finance – REV Group

David Scoulardirector of financial services – Prevost

Moderator Craig Lentzsch, former CEO of Greyhound Lines; former president / CEO of Coach America and past executive director of All Aboard America! Holdings, explores bus financing and leasing and the current state of the market alongside bus finance thought leaders in the industry.

Craig Lentzsch: What is your company’s interest and capability in financing coaches or bus operating companies?

Gregg Goedde: ABC Bus Leasing has been in the bus financing business over 35 years. We handle a variety of leasing and loan opportunities in the bus and motor coach business.  We satisfy our customers’ financing needs with TRAC leases, muni leases, FMVs, operating leases, modified TRAC leases, loans, and short-term leases. One advantage that ABC has is that we’re a privately held company, so we’re able to really use our creativity and flexibility to provide a variety of unique solutions for our customers.

Matt Hotchkiss: We have a team of seven people on the sales side that form our Bus Division at Wells Fargo Equipment Finance. It’s clearly a market that we’re comfortable in and that we’ve been dedicated to for almost 15 years. Our focus is on new and late model motor coaches, shuttle buses, school buses, and delivery and passenger transportation vehicles. We offer loans, leases, and equipment lines of credit.

Amanda Lundmark: 1st Source Bank has been in the equipment finance industry for over 40 years. The Bank entered the Bus segment four years ago, and it is an area targeted for continued growth in 2018. We’re a relationship-oriented full-service bank, and we offer competitive rates and flexible terms on loans and leases for motor coaches, shuttle buses, luxury/limo buses, both new and used. We can also establish a Credit Limit for operators up to $25 million.

David Scoular: Prevost, which is a part of Volvo Group, has a captive finance company, Volvo Financial Services, that we try and utilize as much as possible to keep the customers under one roof/in house. They do have some limitations due to certain rules and regulations. Therefore, we go outside and use sources like the ones represented by Matt Hotchkiss and Amanda Lundmark, and other banks. We’re not a private company, so we do have some public accounting rules we have to follow, but we have a lot of flexibility with our captive finance company to get things done and push through the system, as we choose our own capital from Volvo Group.

Greg Berg: I represent the REV Group. REV Group manufactures 30 commercial, municipal and consumer vehicle brands across several different markets in the US and around the world. More specifically, we have 9 separate bus and transportation brands that we manufacture. We are also the distributor for Setra as well. We have about 600 dealers around the world. We provide floor plan financing, commercial financing, leasing, and loans. On top of that, we have a robust rental business that services the US market across several lines of business.

Lentzsch: What is your view of the availability of secured credit for bus purchases this year compared to last year? Is it easier or more difficult to finance equipment now? Has there been any significant change in pricing?

Berg: Rates have increased with the economy heating up in the last few months. I think everybody is looking at that to continue. In terms of ease of credit, I don’t know if anything’s changed. The nice thing about the bus finance community in North America is that it’s pretty stable. I don’t think there are any impediments at this point to availability of credit.

Scoular: Rates are up and continue to rise and it looks like concern over inflation is going to be there. Rates will likely continue to increase as we go through the year. As for ease of credit, I think it’s still about the same. We haven’t seen or felt it yet, so that’s good from our side. The rising rate environment is going to be the concern as we move forward for the rest of the year.

Lundmark: We are heading into an inflationary period. This is already causing an increase in interest rates. 1st Source has customized programs to keep payments manageable for our customers. We want to remain consistent and will continue to offer financing to clients where it makes sense for both the customer and the bank on a longer-term basis.

Hotchkiss: Banks are flush with cash, and they are trying to find new sources to put their cash to work. The coach market is one area that some seem to be pursuing- at least on a temporary basis.

As everybody alluded to, rates have been consistently climbing since late last year. If you look at the last six months in general, they’ve increased nearly a full percentage point, which is significant. They continue to go up, so it has a meaningful impact on monthly payments for companies buying coaches. For companies that finance on a floating rate, such as a LIBOR index, those rates have also gone up. For example, the 30-day LIBOR rate has climbed from .93% to 1.78% in the last year.

If Wells Fargo provides a floating rate loan, we index to a 30 or a 90-day LIBOR rate. If we’re indexing a proposal that will eventually be a fixed rate when we book the deal, we index to a US Swap rate. So, we’ll take, for example, a five-year swap rate and index to that until documentation of the deal.

Goedde: As a lender that utilizes various sources, including our own ABC Lease Line, the challenge is when I get a lot of calls from lenders who are looking to get into this market. This has helped the end-user by keeping rates extremely competitive.  However, credit now, in some cases, can be too easy. It’s easy because you have people entering the market with zero exposure. When you have banks that want to get in, that have no exposure, they get aggressive.  For the lenders on this roundtable who have been there through the thick and thin, it hurts them as they can’t get the transaction completed with the same terms as a new entrant.

Lentzsch: Rates are up because interest rates are up. It’s a fundamental mark of the government intervention in the marketplace and fear of inflation that’s driving rates up, not because the industry or the credits in the industry are not performing.

Is the new tax law having an impact on either the pricing for leasing or the availability of leasing?

Hotchkiss: We expect there to be more leasing activity this year as a result of the tax change. When we’re able to take 100% bonus depreciation and transfer that into a lower rate, that’s appealing to customers, particularly when the loan rates are significantly higher than they were before. The lower payments under a TRAC lease diminishes the “sticker shock” of higher loan payments resulting from the rising interest rates. Leasing may also be more appealing to operators because the corporate tax rate is now lower reducing the depreciation benefit.

Berg: We think it’s exciting, the growth in leasing, and we set out this year with many goals in leasing all our products across our 30 different brands that we manufacture. It really depends on each market. In the coach business, we do have a leasing business that we are planning on growing. Some of our other businesses are extremely active in leasing. It’s becoming really exciting for customers as we open the doors to the possibilities. For example, a customer may have a new contract that they want to match their operating fleet to. Long and short-term leasing can be used to solve any fleet issues they have. Leasing gives customers an extra element of flexibility.

Scoular: There’s no doubt leasing has always had an area for contracting business, matchup cash flows with contracts, etc. I don’t see a need to have customers strictly take full depreciation on their first multiple coach order. When you start blending leasing and loans together, they still might need some depreciation, but there are also reasons for, on the second coach order to say, “Go ahead and take the lease option to reduce your cash out flow.” It makes it a little more interesting for us. I think we get to be viewed as financers these days versus takers.

Lundmark: I think this will really depend on the individual client’s situation and tax strategy. While the new tax laws are not having an effect on pricing, it is giving our customers capital to expand. Leasing provide ability for companies to grow during a rising rate environment. We do anticipate more leasing activity as clients seek a lower payment in a rising interest rate environment. However, we still anticipate a significant volume of loans due to the reduction in the corporate tax rate.

Lentzsch: You definitely think the leasing market is going to be pretty strong this year. I would tend to agree with you.

Have your credit and documentation standards changed in the last year?

Lundmark: Our credit and documentation standards have not necessarily changed, but we are always looking for opportunities to improve and streamline the credit intake process and documentation packages. Our APP Only amount is at $350M which remains one of the highest in the industry. We have added Equipment Finance Agreements for our commercial leasing customers to reduce the liability exposure.

Berg: They have only in a sense that we’ve opened up to numerous new markets such as rental and leasing markets. When we do financing around the world for our customers and dealers, we’ve had to respond to the specific needs of each market.

In terms of documentation, any time you’re adding new products, you’re always going to update your documents and bring them up to new standards and recent changes.

Goedde: The documentation standards haven’t changed, but, I believe insurance underwriting standards are always changing to meet insurance carrier risk profiles. Insurance brokers are spending more time with their operators to analyze risk and recommend the proper limits of coverage and deductibles.

Scoular: I think documentation standards are always changing and updating, but no major changes. Credit standards-wise, I think, things are pretty much the same.

Lentzsch: Do you distinguish between financing new and used and, if so, how?

Goedde: We do a lot of both and carry a balance of new and used in our portfolio. There are different standards for new and used. The key to the equation is matching term to vintage and value of the used equipment. You want to make sure that the structure and depreciation match the equipment, condition and use.

A challenge can be understanding the pre-owned product. When we’re looking at a piece of equipment, we like to understand and dissect the bus. This includes the former operator, their maintenance program, condition, mileage, geographic history, specifications, etc. That determines the term and how we approach that transaction.

When financing new Van Hools, we are extremely flexible. We still  use much of the same criteria as pre-owned. The difference is that we look into the future use and condition as the coach is new. Geographic location, mileage, maintenance and specifications are key factors in determining the structure along with proper financial wherewithal.

Lundmark: We will finance new and used, but we need to understand more about the underlying collateral when it’s used including mileage, maintenance records, refurbishing, upfits, etc. We also want to understand how the vehicle will be used going forward to ensure our terms are consistent with the remaining useful life of the equipment.

Scoular: We battle with that all the time with the used coach side. I think part of the problem has been, as Matt Hotchkiss said earlier, that there are 12 or so banks now chasing business around here. So, as credit has been easier to get for new coaches, I think that affects the used coach side because we can structure new coach pricing for some of these people who probably should be buying late model used instead of new. But, where the rates were, they were able to just buy new. So, I think, as the rates go up, and if we could tighten some credit standards up a little bit, you might be able to see the used market come back and flourish.

Lentzsch: The industry went through a period of significant consolidation in the late ‘90s to early 2000’s and then, that went stone cold starting around 2010. There have been some acquisitions of coach companies and some modest consolidations.

Do you do acquisition financing, or do you just focus on a piece of iron?

Hotchkiss: We do get involved in acquisition financing, but it has to be the right deal and the right situation for us. We of course have to like the buyer. We also have to like the seller and know they are going to stay on in some capacity, either through a seller note or through an equity ownership in the new entity. It’s critical in our opinion to have that continuity when ownership changes hands. We also like the buyer to contribute equity to the new company. Sometimes that doesn’t happen, and leverage is excessive, which typically makes the deal challenging for us. If we are comfortable with all of these factors we may lend based on the value of the fleet.

Scoular: Yes, to a certain extent. A couple examples are if someone’s flipping fleets around or if it’s a favorable customer buying someone else. We have to help them if they want to trade out coaches – so we can do that. If we have loans and leases with our Volvo Finance and they want to refinance those into the new company or they need some assistance we can do that, but, strictly acquisition financing we don’t do. It’s usually when trades and purchase of new equipment is involved.

Lundmark: We have done acquisition financing, but that is not a key focus of the bank. The deal has to be structured to ensure that the new entity is well positioned to immediately take advantage of synergies created by the new book of business including upgrading equipment, improving utilization, and eliminating costs. Depending on the size of the acquisition we may request a participation from another institution.

Berg: From REV’s perspective, we’ve done it for our dealers. We have not done it for specific end-user customers yet. It really depends on the situation. You have to know your customer. There are some risks involved in doing acquisition financing. Does it make sense? What are the contracts? Where are they located? Again, I think that with advance rates, it really depends upon the specific situation.

You have to consider the contracts, the customers, the location, the seasonality, the match point, do they have some investment or how much investment have they put into this new entity. We’ve seen some fairly successful acquisitions and there is money out there for them. So, I guess that’s a positive for the industry.

Goedde: We do quite a bit of it. We know the steps to complete and certainly help them through that process. Again, being a private company, we can do a lot of creative things to make deals happen. The largest transaction that we have completed involved over 65 motor coaches.

It was a bit daunting to buy over 65 coaches in the morning and sell them hours later to help the buyer and seller complete their transaction. When the opportunity arises, ABC steps up to help customers with financing, titling, and more.

We have experience in all areas and save our customers a lot of time, money and effort.